Business Interruption Insurance

When a fire, tornado or hailstorm damages your business property you have a commercial property insurance policy to repair the damage. But what about the business losses you suffer? A storm can do more than damage your building. It can destroy the income you derive from operating your business.

Most commercial property insurance policies have business interruption insurance or coverage which will cover you for lost income and certain operating expenses. There are a few caveats. First the loss to the building, and therefore the business income loss, must be due to a covered peril (i.e. a loss covered by your policy). These types of losses would usually include fire, lightning, hail, wind (unless from a named storm or along the Texas coast), theft, tornados and vandalism. Some business income losses due to floods, earthquakes or terrorism are not covered.

There are 3 different kinds of coverage associated with business interruption coverage:

  • Business income coverage takes into account the net profit or loss before taxes. This calculation will deduct normal business operating expense and payroll. This loss is usually established based on sales records, historical profit/loss data and current contracts.
  • Extra expense coverage are those expenses incurred over and above normal monthly expenses to restore the operations of the business at a temporary location. This is typically in addition to business income coverage but may also be purchased separately.
  • Contingent business interruption coverage will reimburse you for lost business income due to a loss by a supplier or customer. For example, if you own a supply business and one of your retail vendors loses its building due to fire and cannot sell your supplies, you would have a loss.

As with any commercial insurance policy, pay attention to this aspect of your coverage before you need it. Make sure there is enough coverage to allow you time to get back up and running again. Make certain you have accurate historical data to prove your loss. One common misconception about business interruption coverage is that the business has to be profitable to claim a loss. This is not true. Just because a business is losing money does not mean it cannot have a business interruption loss.

The most common disputes regarding business interruption losses are:

  • Proving up sales and/or income projections;
  • Amount of offsets and credits;
  • Necessity of continuing expenses;
  • What constitutes an “extra” expense;
  • The length of indemnity;
  • Ordinary payroll coverage;
  • Depreciation;
  • Credit for residual value.

Business interruption coverage is an essential piece of coverage. Making certain you maximize your benefits could mean the difference between survival and bankruptcy. Contact us for more information.